The potential or actual loss following Treasury Bond fiasco
Tuesday, 5 May 2015 01:51
By A Special Correspondent
The Bond case is on everyone’s lips these days and there are several very good reasons to investigate further to unearth its mysteries. In addition to unravelling the actions and culpabilities of individuals, it is necessary to discover the roles played by officials of the Central Bank and the Bank of Ceylon.
The delay in releasing the report by the three-member investigation committee to the public has led to a frenzy of speculation about the magnitude of the potential or actual loss to the country caused by accepting bids for Rs. 10 billion at the auction of 30-year bonds on 27 February.
Figures as high as Rs. 40-45 billion are freely thrown around and compared with the cost of various infrastructure projects. These speculations are based on misrepresentation or misunderstanding but have gained strength through repetition – not unlike the fanciful numbers quoted for civilian deaths in the last few months of the war in 2009.
The analysis below is based on official data published on a website*. The main points are:
1.If the Central Bank accepted bids only for bonds up to Rs. 1 billion, as announced, the post-tax, weighted average interest rate (yield) would have been 10.387 % per annum
2.The rest of the bids accepted for an additional Rs. 9 billion worth of bonds were at a post-tax, weighted average yield of 11.875% per annum
3.Together the yield on bonds issued of Rs. 10 billion works out to a post-tax, weighted average yield of 11.727% per annum
Despite the Central Bank reportedly indicating to the market prior to the auction that yields should be in the 9.00-9.50% per annum range, it is clear that the announced amount of Rs. 1 billion could only have been issued at 10.387% per annum.
It is equally clear that the market would not have bought a further Rs. 9 billion at the same yield of 10.387% per annum. The appetite was just not there. However, to calculate a hypothetical loss (or more correctly a hypothetical opportunity cost) to the Treasury, it is necessary to make that false assumption and take the excess interest rate paid as (11.875 – 10.387) % per annum, i.e. 1.488% per annum.
Thus the “loss” for each of the 30 years would be: Rs. 9 billion X 1.488%
This works out to Rs. 134 million for each year. In other words, approximately Rs. 4 billion spread out over 30 years.
It should be noted that the total of Rs. 5 billion worth of bonds allocated to Perpetual Treasuries, the company at the centre of the storm were at yields in the range 11.50-12.50 % per annum. This translates into a post-tax, weighted average yield of 12.313 % per annum.
The foregoing is intended only to demonstrate that the “loss” numbers being quoted are extremely exaggerated, even if unrealistic assumptions are made as above. It is not intended to argue that accepting bids exceeding the Rs 1 billion that was announced, and that too at extraordinarily high yields, was a correct or rational thing to do when there were several alternatives available.